Ever since Congress last renewed the program in 2007, I’ve expected that reauthorizing the Terrorism Risk Insurance Act (TRIA) would dominate Washington’s insurance debate in late 2014. I’m not so sure any more. In fact, another issue—Solvency II—seems likely to distract a lot of the insurance lobbyists and committees through the rest of 2014.
Although many members of Congress would probably just as soon let the TRIA program lapse, I expect that Congress will end up playing “kick the can” and renewing it for a year or two with only modest changes. Quite simply, the program’s proponents are well-organized and motivated, while its many detractors are not. In the end, I’m willing to bet that leadership in both the House and the Senate quietly round up the bare minimum of votes for a one- or two year renewal, rather than trying to reform it or letting the program lapse.
This will leave some time for Washington insurance lobbyists, congressional staffers and others to focus on what I think will be the real issue of 2014 and 2015, as well: Solvency II and, more broadly, the idea that the United States may adopt European-style solvency standards for insurers. It has dominated plenty of my conversations in the past few weeks, even some that I expected to focus on other topics.
Although the federal government doesn’t even have any existing legislative mechanism that would allow it to adopt Solvency II, or anything like it, by Jan. 1, 2016 (when it’s slated to go into force in the European Union) it’s likely that some federal officials (and maybe a few state ones, too) will propose adoption of some EU-style capital requirements. It’s certainly a factor in trade negotiations.
For internationally active insurance groups—those that operate in more 3 or more countries—this could cause them to reallocate capital and make all sorts of other changes. I haven’t seen any formal yet of what this would do the market (R Street is researching the question) but I can make some educated guesses about what we can expect.
Imposing EU-style capital standards on the United States seems quite unlikely to pass a reasonable cost-benefit test: The best possible result of higher capital standards would be zero P&C insolvencies. Since many insolvencies result from things other than inadequate capital and E.U. standards aren’t infallible, this is far too generous. Given that there have been very few insolvencies, in any case, EU-style solvency standards are a solution in search of a problem.
Some EU standards don’t even make sense in the EU context and would make even less sense in a U.S. context: For what I have to assume are political reasons, the E.U. “counts” Greek, Irish and Portuguese debt at its face value. On the other hand, it forces insurers that hold the debt of U.S.-based GSEs like Fannie Mae and Freddie Mac to discount their value, even though the U.S. government has made its previously implicit guarantee of this debt explicit. This is nonsense.
Adding the E.U. system on top of the U.S. system makes little sense: If I were allowed to create an insurance system with a “blank sheet of paper,” I’d certainly eliminate rate regulation, possibly due away with guaranty funds and work to assure that solvency regulation was as good as possible. This might well result in something like Solvency II as the EU will implement it. But we’re not talking about a blank sheet of paper. Solvency II or something like it would presumably be overlaid on a system that will retain both guarantee funds and rate regulation. This makes things complicated while producing no consumer benefit
The big consequences will be felt in commercial lines: Only two of the top ten auto insurers and three of the top ten homeowners’ insurers appear likely to be impacted by standards impacting internationally active insurance groups. By contrast, there any U.S.-only insurance groups who figure among the leaders in lines like aircraft insurance. Where capital standards are significantly raised, we can expect consumers of these lines of coverage will soon be asked to pay higher rates.
State legislators will fight it: Although stranger things have happened, I can’t see a single state where lawmakers (or, in most cases, the elected or appointed insurance commissioner) would actively endorse something like Solvency II.
There are still lots of unknowns. But solvency regulation is going to be a major issue in 2014.
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